Investment Highlights

• We maintain our HOLD recommendation on IOI Corporation with a higher fair value of RM4.30/share (vs. RM4.20/share originally). Our fair value for IOI is based on an FY21F PE of 27x. We have raised IOI’s FY20F net profit by 2% to account for a higher average CPO price assumption of RM2,300/tonne vs. RM2,200/tonne previously.

• At first glance, IOI’s 1QFY20 core net profit (ex-forex loss of RM55.9mil) of RM204.9mil appears to be below consensus estimates and our expectations. However, we are keeping IOI’s FY20F earnings forecast in anticipation of improved CPO price in the following quarters.

• IOI’s core net profit was flat YoY at RM204.9mil in 1QFY20 in spite of a 5.3% decline in turnover. Manufacturing earnings compensated for a decline in plantation profits in 1QFY20.

• Although IOI’s FFB production climbed by 12.4% YoY in 1QFY20, this could not offset the impact of weaker CPO prices. Average CPO price realised declined by 9.9% to RM2,014/tonne in 1QFY20 from RM2,236/tonne in 1QFY19. As a result, IOI’s plantation EBIT (ex-associates and fair value changes) slid by 1.9% YoY to RM104.4mil in 1QFY20.

• Manufacturing EBIT (ex-associates and fair value changes) expanded by 19.6% YoY to RM109.4mil in 1QFY20. Manufacturing EBIT margin inched up to 6.4% in 1QFY20 from 5.0% in 1QFY19.

• IOI’s manufacturing division recorded higher sales volume (for refining) and refining margins in 1QFY20. Refining accounted for 30% to 40% of IOI’s manufacturing EBIT in FY19 while oleochemicals made up the balance 60% to 70%.

• Net gearing stood at 21.7% as at end-September compared with 24.3% as at end-June 2019. About 78.6% of IOI's RM4.7bil gross borrowings were denominated in USD. IOI's gross cash reserves stood at RM2.7bil as at endSeptember 2019.

• IOI said that it anticipates lower FFB production in FY20F due to an intensive replanting programme. However due to higher CPO prices, the group’s plantation division is expected to perform better in FY20F compared with FY19. IOI added that the operating environment for the manufacturing division is challenging due to the global economic slowdown. In spite of this, the division’s performance is expected to be satisfactory in FY20F underpinned by cost efficiencies.

Source: AmInvest Research - 27 Nov 2019